ATO Interpretative Decision

ATO ID 2003/300 (Withdrawn)

Income Tax

• This ATO ID is withdrawn from the database as it is a simple restatement of the law and does not contain an interpretative decision.
  This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Does the assumption of debtor solvency in section 245-55 of Schedule 2C to the Income Tax Assessment Act 1936 (ITAA 1936) apply in determining the notional value of a commercial debt where the debtor and creditor were not dealing with each other at arm's length in respect of the incurring of a debt that was not a moneylending debt?

Decision

No. Subsection 245-55(4) of Schedule 2C to the ITAA 1936 states that the assumption of debtor solvency in both paragraph 245-55(2)(a) (in respect of the first applicable amount) and subparagraph 245-55(3)(a)(i) (in respect of the second applicable amount) of Schedule 2C to the ITAA 1936 does not apply in those circumstances.

Facts

Debtor incurred a commercial debt as defined in section 245-25 of Schedule 2C to the ITAA 1936.

The debt was not a moneylending debt as defined in subsection 245-245(1) of Schedule 2C to the ITAA 1936.

Debtor and Creditor did not deal with each other at arm's length in respect of the incurring of the debt.

After 27 June 1996 Creditor forgave the debt owed by Debtor.

At the time when the debt was forgiven Creditor was a resident.

The debt was not a non-recourse debt for the purposes of section 245-60 of Schedule 2C to the ITAA 1936 nor a parked debt for the purposes of section 245-61 of Schedule 2C to the ITAA 1936.

Reasons for Decision

Section 245-10 of Schedule 2C to the ITAA 1936 provides that Schedule 2C applies where a forgiveness of a commercial debt occurs after 27 June 1996.

The notional value of debts other than non-recourse debts and parked debts are to be determined in accordance with section 245-55 of Schedule 2C to the ITAA 1936.

In determining the notional value of a debt an assumption is made that the debtor is solvent both at the time that the debt was incurred and at the time that it was forgiven unless the exception outlined in subsection 245-55(4) of Schedule 2C to the ITAA 1936 operates.

Subsection 245-55(4) of Schedule 2C to the ITAA 1936 applies to the debt owed by Debtor. Debtor and Creditor (a resident) did not deal with each other at arm's length in respect of the incurring of the debt and the debt was not a moneylending debt.

Therefore the assumption of debtor solvency as outlined in paragraph 245-55(2)(a) and subparagraph 245-55(3)(a)(i) of Schedule 2C to the ITAA 1936 does not apply and the notional value of the debt is referable to the Debtor's actual capacity to pay the debt at the time it was incurred.

Year of income:  Year ended 30 June 2003

Legislative References:
Income Tax Assessment Act 1936
   Schedule 2C
   Schedule 2C, section 245-10
   Schedule 2C, section 245-25
   Schedule 2C, section 245-55
   Schedule 2C, paragraph 245-55(2)(a)
   Schedule 2C, subparagraph 245-55(3)(a)(i)
   Schedule 2C, subsection 245-55(4)
   Schedule 2C, section 245-60
   Schedule 2C, section 245-61
   Schedule 2C, subsection 245-245(1)

Keywords
Debt forgiven

Business Line:  Losses and CGT Centre of Expertise

Date of publication:  16 May 2003

ISSN: 1445-2782